Let’s face it, Bitcoin is very slow and is not yet at a stage where it can be adopted by the mass public.
It may even be the last barrier before widespread usage.
The lightning network was first proposed to the Bitcoin community by Joseph Poon and Thaddeus Dryja in 2016 and has been in the works since then.
Will it finally be the solution Bitcoin has been looking for?
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What Is The Lightning Network For?
As you are probably aware, Bitcoin in its current state can only handle 7 transactions per second (tps).
This is incredibly slow in comparison to Visa which can handle supposedly up to 24,000 tps and PayPal, which can handle 193.
To make things worse, it then takes another 10 minutes for a transaction to be confirmed.
And that’s in ideal conditions. When the network is very busy, it can take even longer. During the 2017 bull run, some transactions took days to be completed.
On top of tps, there is also the issue of transaction fees which can increase when the market is running at total capacity.
The lightning network aims to solve these key issues to make Bitcoin faster and more efficient to use.
In its current state, Bitcoin is not a useful way to make small payments, such as buying a coffee. You don’t want small payments like that hanging over you.
The lightning network was developed by Lightning Labs.
How Does The Lightning Network Work?
The lightning network is a second layer ‘off-chain’ solution that sits on top of the Bitcoin blockchain. Essentially, the lightning network uses payment channels between different users.
Nothing has changed to the Bitcoin blockchain, which continues to keep the network secure.
A user on the lightning network can set up a payment channel with another user when they create a payment channel, which requires them both to make a deposit.
This is recorded on the blockchain, but the channel stays open until one of the two users decides to close the channel.
When the channel is closed this is also recorded on the blockchain.
While the channel is open, the two parties can send each other money back and forth as much as they like with no limitations on time.
However, it should be mentioned that in order to receive money through a channel, the party that is to be paid has to invoice the sender.
In most instances, this will take the form of a QR code which the sender will scan to send money.
Not only will these small payments be quicker to complete ‘off-chain’, but they will also take a lot of traffic away from the blockchain which will speed up transactions there too.
An interesting thing to point out is that payments taking place off-chain are not so unusual.
In fact, most cryptocurrency transactions actually happen off-chain in centralised databases, such as exchanges.
The lightning network also has lower fees for senders.
By taking part in the network as a node, you can take fees when you route payments, incentivising people to take part and connect with as many nodes as possible.
If a channel is going to handle a lot of funds, it needs to be funded with more Bitcoin. That said, if it is very large, it may be better to complete it on the Bitcoin blockchain.
Users can refill channels and keep Bitcoin in the lightning network as long as they want.
Lightning network is sometimes compared to IOTA's Tangle, Nano and Hashgraph, however, it should be noted that although they may look similar they work very differently.
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Multiple payment channels
Payment channels between two users are not the only way the lightning network works.
If that was the case they wouldn’t be that useful because everyone would have to set up a payment channel whenever they paid anyone.
The lightning network has been designed to find the fastest way to pay parties by using other payment channels that are already open.
Your payment may go through four or five different individuals before the receiver gets it. Despite this, it is all very fast and secure. It always looks for the quickest way.
You can read more about how the lightning network works by reading the white paper.
How successful has the lightning network been?
The lightning network has grown exponentially since it started with as many as 4,463 nodes operating on the network and 31,703 channels, at the time of writing, according to the Lightning Network Explorer.
The lightning network has also made it possible to use Bitcoin to tip people through applications like tippin.me, a way to tip people online like on Twitter or for content creation.
Dogecoin has also been used in a similar way but only now with the lightning network is it possible to do it with Bitcoin with small amounts, quickly and cheaply.
But Is It All Good News?
It’s never completely good news.
First off, the lightning network was one of the reasons why Bitcoin Cash split from Bitcoin.
The team behind Bitcoin Cash argued that the lightning network and SegWit2x were changing Bitcoin too much and it was no longer what Satoshi Nakamoto planned.
Bitcoin Cash then went on to increase the block size from 1 MB to 8, which they believed would solve issues of scalability and stick to Nakamoto’s original plans.
The remaining Bitcoin community didn't want to increase block size because it will require a hard fork which can be risky for the blockchain and supposedly bigger blocks can result in centralisation.
While some pay claim that the Bitcoin and Bitcoin Cash split was good for Bitcoin, the split did harm the community and arguably made Bitcoin less whole.
Another thing to consider is that it is supposedly possible for one of the parties to close the channel when the other party has been offline for a long period of time and take all that was deposited. This is known as a fraudulent channel close.
Could the lightning network be controlled by big banks?
Some critics are concerned that the lightning network will simply become a way for large banks and corporations to dominate Bitcoin by opening many payment channels.
In January 2019, it was reported that supposedly the 10 largest nodes currently have 38% of the network capacity.
One company, LNBIG.com has 20 public nodes that supposedly operate up to 64% of the network.
If the lightning network becomes centralised, it will push away many people who are interested in using it.
That said, Bitcoin is already technically centralised due to mining pools controlling much of the hashing power.
Theoretically, as more nodes join the network and open more payment channels, it will become less centralised.
It is important to remember that it is still in its early days, which is why it is easy for the lightning network to be centralised.
There are some that argue that the lightning network is centralised because of the way they look at it, particularly as a 2D graph.
When this is done, it looks like some nodes control most of the network, but when you look at the network as a 3D graph, you see that there are no central points.
The Lightning network is not centralised because of three reasons, you cannot be censored, you cannot double-spend and there is no signal point of failure.
Other more cynical critics point out that Blockstream is behind the creation of the lightning network and are gaining a lot of influence over Bitcoin's development.
Blockstream is funded by digital currency group which has strong ties to the banking community.
What Happens If The Lightning Network Doesn’t Work?
If the lightning network doesn’t work, it may be catastrophic for Bitcoin as it may appear that it is impossible to overcome the issues of scaling that have plagued Bitcoin.
It may lead people to believe that Bitcoin Cash, by increasing the block size, has the correct approach.
But the repercussions maybe even bigger than that. It may also lead people to conclude that any cryptocurrency that works like Bitcoin is also doomed.
This may lead cryptocurrency enthusiasts to believe that blockchain technology is a dead end and may pursue different data structures like DAGs.
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Key points
If you remember anything from this article, make it these key points.
- The lightning network is a second layer that sits on top of the Bitcoin blockchain. It is ideal for sending micropayments and will reduce congestion on the blockchain.
- It uses payment channels to send funds. These channels can stay open as long as the parties wish them to be.
- Users are incentivised to be nodes. If your payment channel is used, you can earn from it.
- There is a concern that it may become centralised. Big banks and companies may end up with a lot of the nodes and payment channels.
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